CCA 1212008: IRS analyzes taxation of green card holders working for the Italian Embassy

Plain-English summary

The Office of Chief Counsel analyzed whether lawful permanent residents working for the Italian government in the United States could exclude their compensation from United States federal income tax. It concluded that green card holders could not claim the exemption in the 1878 U.S.-Italy consular convention because they could not be consular officers, and that the 1984 income tax treaty did not exempt their compensation. The advice also concluded that IRC § 893(a) generally did not exempt the compensation of green card holders who had not signed the USCIS Form I-508 waiver unless they established all statutory conditions under the facts and circumstances. If Italy had the primary right to tax the compensation under the treaty, the advice stated that the United States would provide a foreign tax credit under Article 23(2), subject to United States law.

Ruling snapshot

• Question: Is compensation paid by the Italian government to green card holders working in the United States exempt from United States federal income tax?
• Outcome: Advice given.
• Key authorities: 1878 U.S.-Italy consular convention; 1984 U.S.-Italy income tax treaty, Articles 1, 19, and 23; IRC §§ 893 and 7701(b)(1)(A)(i); Treas. Reg. § 1.893-1(a)(5); 26 U.S.C. § 6110(k)(3)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201212008
       Release Date: 3/23/2012
       CC:INTL:B01:CAEdson
       POSTN-146248-11

UILC: 9114.03-20

date: February 02, 2012

 to:   Michael Richard
       Manager
       (International Individual Compliance Examination Group 2126)

from: M Grace Fleeman
Senior Technical Reviewer, Branch 1
(International)

subject: Taxation of Green Card Holders at the Italian Embassy

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.


       ISSUES

       Whether the compensation of lawful permanent residents of the United States (“green
       card holders”) working for the Italian government in the United States is exempt under:

          1) the 1878 U.S.-Italy consular convention?
          2) the 1984 U.S.-Italy income tax treaty?
          3) section 893 of the Internal Revenue Code (“I.R.C.”)?


       CONCLUSIONS

          1) Because green card holders cannot be consular officers, the 1878 U.S.-Italy
             consular convention does not exempt the compensation of green card holders
             working for the Italian government in the United States.
          2) The 1984 U.S.-Italy income tax treaty does not exempt the compensation of
             green card holders working for the Italian government in the United States. If
             Italy has the primary right to tax the compensation under Article 19(1)(a) and the

POSTN-146248-11 2

     United States taxes by virtue of the saving clause in Article 1(2)(a), the United
     States will provide a foreign tax credit under Article 23(2).
  3) I.R.C. § 893(a) does not exempt the compensation of green card holders who are
     working for the Italian government in the United States and have not signed the
     USCIS Form I-508 waiver, unless such green card holders establish, under the
     facts and circumstances, that the enumerated conditions of I.R.C. § 893(a) are
     met.

FACTS

You have requested guidance on whether the compensation of green card holders
working for the Italian government in the United States is exempt from U.S. federal
income tax. In particular, you have asked us to focus on the 2006, 2007 and 2008 tax
years. You have explained that you have cases involving green card holders working
for the Italian Embassy in Washington, D.C. and claiming to be exempt from U.S.
income tax as consular officers.

LAW AND ANALYSIS

1. 1878 U.S.-Italy consular convention

The U.S.-Italy convention concerning the rights, privileges, and immunities of consular
officers, concluded May 8, 1878 (“U.S.-Italy consular convention”), remains in force
today.1 The second paragraph of Article III of the U.S.-Italy consular convention
provides: “Consular officers, citizens of the state by which they were appointed, . . .
shall be exempt from all national, state or municipal taxes, imposed upon persons either
in the nature of capitation tax or in respect of their property . . . .” There may be a
question as to whether this provision applies to an income tax, because an income tax
is neither a capitation tax nor a tax in respect of property. However, even assuming the
provision applies to an income tax, it applies only to “consular officers” who are “citizens
of the state by which they were appointed.”2

The interpretation of consular conventions and the determination of who is a “consular
officer” are under the jurisdiction of the State Department. In a diplomatic note dated
November 5, 1986, the State Department “set forth the general policy of the United
States Government regarding consular recognition so that it may be uniformly a matter
of record.” Among other things, the diplomatic note states that “[i]n order to be eligible
for recognition as a career consular officer, an individual must . . . be the holder of an

1
20 Stat. 725. See U.S. Department of State, Treaties in Force, as of January 1, 2011.
2
The facts provided do not indicate whether the employees are citizens of Italy. Even if they are citizens
of Italy, however, they are not eligible for benefits under the U.S.-Italy consular convention unless they
are classified as consular officers by the State Department.
POSTN-146248-11 3

A-1 non-immigrant visa.”3 Individuals who hold green cards rather than A-1 visas are
therefore not eligible for benefits under the U.S.-Italy consular convention.

Note that the State Department publishes a complete and official listing of foreign
consular offices in the United States, which includes recognized consular officers.4
Notably, the list provides no Italian consular offices or recognized consular officers in
the District of Columbia. The list notes that the status of persons listed in the
publication should be verified with the Office of Protocol. The State Department
suggests that IRS employees should contact -------------------------at ----------------------------
--------------------------------.

2. 1984 tax treaty

The U.S.-Italy income tax treaty signed in 1984 applies to tax years 2006, 2007, and
2008.5

Paragraph 1 of Article 19 (Government Service) provides:

       (a)     Remuneration, other than a pension, paid by a Contracting State or a
               political or administrative subdivision or local authority thereof to an
               individual in respect of services rendered to that State or subdivision or
               authority shall be taxable only in that State.
       (b)     However, such remuneration shall be taxable only in the other Contracting
               State if the services are rendered in that State and the individual is a
               resident of that State who:
               (i)     is a national of that State; or
               (ii)    did not become a resident of that State solely for the purpose of
                       rendering the services;
               provided that the provisions of clause (ii) shall not apply to the spouse or
               dependent children of an individual who is receiving remuneration to which
               the provisions of subparagraph (a) apply and who does not come within
               the terms of clause (i) or (ii).

Under Article 19(1)(a), remuneration paid by Italy to an individual in respect of services
rendered to Italy shall be taxable only in Italy. Under Article 19(1)(b)(ii), such
remuneration shall be taxable only in the United States if the services are rendered in
the United States and the individual is a resident of the United States who did not
become a resident of the United States solely for the purpose of rendering the services.
If Article 19(1)(b)(ii) applies, the embassy remuneration is taxable only in the United

3
A copy of the diplomatic note is attached to this memorandum. See also 81 Am. J. Int’l L. 405, 408
(1987); Cumulative Digest of United States Practice in International Law 1981-1988, Ch. 4, § 2, 1083-85.
4
http://www.state.gov/s/cpr/rls/fco/.
5
The U.S.-Italy income tax treaty signed in 1999 generally applies to tax years beginning with 2010.
POSTN-146248-11 4

States. If only Article 19(1)(a) applies, the embassy remuneration is taxable only in
Italy. However, under the saving clause in Article 1, the embassy remuneration will also
likely be taxable in the United States.

Article 1 (Personal Scope) provides, in relevant part:

    2.      Notwithstanding any provision of this Convention except paragraph 3 of
            this Article, a Contracting State may tax:
            (a)     its residents (as determined under Article 4 (Resident));
            …
            as if there were no convention between the Government of the United
            States of America and the Government of Italy for the avoidance of double
            taxation with respect to taxes on income and the prevention of fraud or
            fiscal evasion.

    3.      The provisions of paragraph 2 shall not affect:
            …
            (b)   the benefits conferred by a Contracting State under Articles 19
                  (Government Service), … upon individuals who are neither citizens
                  of, nor have immigrant status in, that State.

A green card holder is treated as a resident of the United States under I.R.C.
§ 7701(b)(1)(A)(i). Such person would also likely be treated as a resident of the United
States under Article 4(1) if he or she is living and working in the United States.6

Under Article 1(2)(a), the United States generally may tax its residents (as determined
under Article 4) on their worldwide income, as if there were no treaty. Article 1(3)(b)
lists Article 19 as an exception to the saving clause, but this exception is only available
to individuals who are neither U.S. citizens nor green card holders. Thus, even if Article
19(1)(a) applies, and not Article 19(1)(b)(ii), the United States can also tax the green
card holder’s embassy remuneration.

If Italy has the primary right to tax the remuneration under Article 19(1)(a), and the
United States can also tax by virtue of the saving clause in Article 1(2), double taxation
is alleviated by Article 23 (Relief from Double Taxation). Under Article 23(2), the United
States will provide a credit against U.S. tax based on the amount of tax paid to Italy on
the embassy remuneration and subject to the limitations of U.S. law.

6
If such person is also a resident of Italy under Italian law, then he or she must determine his or her
residency status under the tiebreaker rules of Article 4(2). Because such person is living and working in
the United States, he or she will likely be treated as a resident of the United States for treaty purposes
based on the center of vital interests test.
POSTN-146248-11 5

3. I.R.C. § 893

I.R.C. § 893(a) exempts from federal income tax the compensation of employees of
foreign governments received for official services if certain enumerated conditions are
met. However, the exemption is not applicable to green card holder foreign government
employees who have signed the waiver (USCIS Form I-508) provided under section
247(b) of the Immigration and Nationality Act (8 U.S.C. § 1257(b)).7 A green card
holder employee is no longer entitled to the tax exemption conferred by I.R.C. § 893(a)
from the date of signing the USCIS Form I-508 waiver. See Treas. Reg. § 1.893-
1(a)(5).

I.R.C. § 893(b) instructs the Secretary of State to certify to the Secretary of the Treasury
that the foreign government grants an equivalent tax exemption to U.S. government
employees performing similar services in such foreign country and the character of the
services performed by employees of the Government of the United States in foreign
countries. Although an I.R.C. § 893(b) certification of reciprocity will greatly simplify a
foreign government employee’s claim of exemption from tax and the IRS’s ruling on that
claim, it is not a prerequisite for the tax exemption provided under I.R.C. § 893(a). See
Abdel-Fattah v. Commissioner, 134 T.C. No. 10 (2010) and AOD 2010-04; 2010-47
I.R.B. 1 (November 22, 2010).

Without an I.R.C. § 893(b) certification, a foreign government employee is entitled to the
I.R.C. § 893(a) tax exemption only if he or she can establish, under the facts and
circumstances, that the enumerated conditions of I.R.C. § 893(a) (i.e., that the
employee is not a citizen of the United States, that the services rendered by the
employee are of a character similar to the services rendered by employees of the U.S.
government in foreign countries, and that the foreign government grants an equivalent
tax exemption to such U.S. government employees performing similar services in that
country) are met. See Abdel-Fattah, supra.

In the case of Italy, the State Department has not issued an I.R.C. § 893(b) certification.
Accordingly, in order to qualify for I.R.C. § 893 tax exemption, a green card holder
working for the Italian government in the United States (who has not signed a USCIS
Form I-508) has the burden to establish that all the enumerated conditions of I.R.C.
§ 893(a) are met. Currently, the IRS is not aware of any Italian statute, regulation,
executive order, or other document that demonstrates that Italy grants an equivalent tax
exemption to similarly situated U.S. government employees working in Italy (i.e., U.S.

7
Under U.S. immigration law, an immigrant (i.e., green card holder) who becomes an employee of a
foreign government at the time of his or her entry into the United States or subsequently is required to
sign a USCIS Form I-508 waiver if he or she wishes to retain their green card (immigrant status) while
working for the foreign government in the United States; otherwise his or her immigration status will be
adjusted to that of a nonimmigrant.
POSTN-146248-11 6

government employees working in Italy who do not have diplomatic or consular ranking,
regardless of their residency status in Italy).8

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call -------------------at --------------------- if you have any further questions.

8
Neither the Italian Income Tax Consolidation Act (1986) nor the Italian Tax Reform Act (2004) contains
any provisions that would exempt U.S. government employees working in Italy from Italian income tax.
U.S. government employees who have diplomatic or consular rank are exempt from Italian income tax
under the Vienna Convention on Diplomatic Relations (23 U.S.T. 3227) and the Vienna Convention on
Consular Relations (21 U.S.T. 77), respectively.